In the Whirlpool of Deregulation

The economy changed from real- to finance capitalism since the 1970s. This was not an accidental development. The economic researcher Stephan Schulmeister sees a pattern where deregulation regularly created problems that were fought with more deregulation.

IN THE WHIRLPOOL OF DEREGULATION

The economy changed from real- to finance-capitalism since the 1970s. This was not an accidental development. The economic researcher Stephan Schulmeister sees a pattern where deregulation regularly created problems that were fought with more deregulation.

Different "game instructions" are possible in capitalist market societies, writes Stephan Schulmeister of the Austrian Institute for Economic Research. The economist describes the phase from the end of the Second World War to the 1970s as a "real-capitalist game instruction." In this constellation, the pursuit of profit of entrepreneurs was directed almost exclusively at activities in the physical world, at investments in machines instead of financial derivatives. Fixed exchange rates, low real interests, stable raw material prices and "dormant" stock markets were the framing conditions. The consequences were high growth rates and continuous full employment, Schulmeister says.

The finance-capitalist downturn followed the real capitalist upswing, according to the analysis of the economic researcher. "In finance capitalism, unstable exchange rates and raw material prices, interest-rates above the growth rates and booming stock markets curb entrepreneurial activities in the real economy and financial speculations simultaneously become increasingly attractive." In this constellation, growth and employment declined and state indebtedness rose faster. The present European jobs- and state debt crises are the temporary peak of this development, Schulmeister summarizes.

The researcher explains the long way to the current crisis as a series of political decisions on reducing regulations in favor of financial management. Crises arose in the real economy that should be solved by more deregulations. He calls this the "neoliberal two-step." Central stations of this development include:

- The US dollar massively lost value at the beginning of the 1970s and adopted the decontrol of its currency.

- OPEC countries reacted with higher oil prices that triggered recessions with increasing unemployment and strong price increases
Central banks rely on high interest policy to stop inflation. In Europe real interests were higher than the growth rate of the economic output. The situation of producing economies worsened while financial investments were more attractive.

With the deregulation of the financial markets and the rise of new derivative markets in the 1980s, real capital formation lost more ground to the financial sector. Unemployment and state indebtedness soared. As the political consequence, states should save, especially in the social area. This firm belief was manifest in the Maastricht criteria. Then the so-called fiscal pact was added.

Booming financial markets and weakened social states increased inequality and dampened the consumption demand, Schulmeister explains. Employment stagnated even more. To reduce unemployment, the labor markets were deregulated and precarious jobs were promoted or allowed.

The social cuts and cuts in state pension systems supplied the justification for the call to individual provisions. This poured out more funds on the exchanges where institutional investors according to Schulmeister's analysis have a systemic advantage over small investors.

Expansion of the financial sector makes the most important players so large that they must be rescued with tax funds from threatening insolvency. Trusting in this, the "financial alchemists" intensify the "self-referential money multiplication" - with cheap money made available by the central banks for the support of the real economy.

To master the crisis, Schulmeister explains, "neoliberal economists and politicians" demand those therapies "that are part of the sickness: reducing state spending, extensive privatization, protection of financial assets and no increase of the top tax rate or other contributions of the top earners." The researcher expects decision-makers in the future will consider other concepts - when the current stock boom collapses and the supposed asset-growth is again revealed to be fictional. The learning process will continue: "The spirit that was invoked more than 40 years ago cannot be easily excised."

Source: Stephan Schulmeister: Real Capitalism and Finance Capitalism - Two "Game Instructions" and Two Phases of the "Long Cycle" in: Jurgen Kromphardt (ed): Rediscovery of Keynesian Theory and Empirical Analysis, Marburg 2013. The graph "Finance capital gains dominance" in the German original is from the Hans Boeckler Foundation 2014
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